Cannabis stocks are doing more than just blowing smoke
Don’t call it a comeback yet, but go ahead and take a peek at how cannabis stocks have performed over the past few months.
OK, well, actually call it a comeback. Because what these stocks have done since November is absolutely mind-boggling.
The ETFMG Alternative Harvest ETF (NYSEARCA:MJ) – a collection of the world’s largest cannabis stocks – has more than doubled since Election Day 2020. That’s a 100%-plus rally in three months.
What’s going on?
The tide is turning in the marijuana industry, and the long overdue Pot Stock Boom that everyone expected to happen a few years back, is finally happening right now.
First, let’s get one thing clear: The global cannabis megatrend is all about legal developments.
-The demand is there. We know that. Just look at the black market for cannabis. That’s a roughly $70 BILLION industry in the U.S. alone – and a multi-hundred-billion-dollar industry globally. It’s growing, rapidly, as today’s high school and college students actually smoke weed about as often as they drink alcohol (whereas decades ago, alcohol consumption dominated weed consumption among young folks).
Demand for cannabis globally is enormous.
Thus, the cannabis megatrend isn’t about generating new demand for weed. It’s about transferring the already enormous demand for weed from the black market to the legal market.
How do you do that? Favorable legal action.
And that’s exactly what you’re getting these days.
In 2020, Canada – one of the pioneers for federal cannabis legalization – significantly eased cannabis market restrictions and created a better legal framework that is pulling demand from the black market into the legal channel.
These key changes include:
- Pivoting from a “lottery system” for retail store openings to an “open licensing” model, which has removed a hard-cap on the number of cannabis stores allowed to operate in certain provinces and caused a surge in legal pot distribution.
- Introducing new derivative products like edibles and drinks into the market, which has sparked a surge in consumer demand.
- Dropping the price of legal cannabis to C$7.05 per gram, which undercuts the cost of black market weed at around C$8 per gram.
For the first time ever, legal pot spending in Canada topped black market spending in the second quarter of 2020.
At the same time, U.S. legalization efforts are starting to gain serious momentum.
During Election 2020, five states had cannabis legalization on the ballot. All five passed it, including some traditionally conservative states like Montana and Arizona.
Meanwhile, U.S. President Joe Biden has made it known that he intends to nationally decriminalize cannabis – which, of course, is a significant stepping stone toward eventual nationwide legalization.
And just last week, three high profile Democrats – Senate Majority Leader Chuck Schumer and Democratic Senators Cory Booker of New Jersey and Ron Wyden of Oregon – put out a joint statement that said they will put forward and advance comprehensive cannabis reform legislation.
Also, a headline that’s flying under the radar is that Mexico will legalize cannabis this year, too.
If you’re keeping score that means the following:
- Canada’s legal cannabis market is on the cusp of finally coming into its own.
- The U.S. legal cannabis market is ready to come to life.
- The Mexico legal cannabis market will come online soon, too.
It doesn’t take a rocket scientist to connect those dots.
The global stage is set for the long overdue “Pot Stock Boom” to finally arrive – and for this “sleepy” industry to shift into hypergrowth gear.
What’s the best way to play this breakout?
I have four favorites.
On the grower side, I like Canopy Growth (NASDAQ:CGC) for its first-mover’s advantage, talented management team, and multi-billion-dollar investment from Constellation Brands. I also like Cronos (NASDAQ:CRON) for its unique R&D-focused business model and multi-billion-dollar investment from Altria.
On the retail side, I like GrowGeneration (NASDAQ:GRWG) for its compelling opportunity to turn into something like the “Home Depot of Pot.”
And on the technology side, I like WM Holdings (NASDAQ:SSPK) because its Weedmaps digital listings platform is already cemented as the “Google of Marijuana.”
Each of those four stocks has been absolutely on fire over the past few months.
But they are also far from done. The cannabis industry will birth titans of industry worth tens of billions of dollars – and the aforementioned stocks have a very good chance of becoming those titans.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Note: This article originally appeared at InvestorPlace.